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The Bond Rally Flounders as the $16 Billion Test Looms

November 20, 2023
minute read

The robust performance of the world's largest bond market, on track for its best month since March, encountered a setback on Monday as investors braced for a $16 billion sale of 20-year Treasuries.

Wall Street, particularly attentive to debt auctions, noted the recent sizable premium offered by the U.S. during the sale of 30-year securities. A positive reception would signify an endorsement of the November rally, while poor results could have the opposite effect. These auctions are gaining increasing influence over stocks, underscoring the current impact of rate movements on markets.

Despite a rise in ten-year U.S. yields, which remained below 4.5%, the S&P 500 approached its highest level since August, propelling the Nasdaq 100 toward a 22-month high. Microsoft Corp. saw an increase as it hired OpenAI co-founders Sam Altman and Greg Brockman to lead its new in-house advanced artificial intelligence research team. The dollar was poised for an 11-week low.

Concerns were raised about the 20-year Treasury supply in a holiday-shortened week, with analysts suggesting potential "indigestion" in the market ahead of the sale. The outcome of the auction was anticipated to be a market catalyst, with weak results possibly triggering a rebound in yields, particularly considering lower market participation this week.

Principal Asset Management highlighted the "unsustainable state" of the fiscal budget, leading to increased Treasury issuance. Despite potential demand challenges, the firm argued that a higher-for-longer rate environment is justified, emphasizing the attractiveness of Treasury yields for investors seeking stability amid an uncertain 2024.

Following softer-than-expected inflation data, the Bloomberg U.S. Aggregate index, tracking $25 trillion of investment-grade government and corporate debt, recorded gains last week and is positive for the year. Despite a record loss in 2022, the index declined slightly in the previous year.

As the dollar rally stalled, market watchers awaited firm real-sector data to challenge the current dovish Fed narrative. Some analysts, like Win Thin from Brown Brothers Harriman & Co., suggested that the dollar remains vulnerable until there is a shift in market sentiment and expectations.

UBS Global Wealth Management's Solita Marcelli expected the U.S. dollar to remain stable in early 2024 due to robust economic growth and high interest rates relative to the rest of the world.

Amid the conclusion of the earnings season, investors awaited results from retailers and tech companies, including Nvidia Corp., Best Buy Co., Nordstrom Inc., and Lowe’s Cos. Market watchers expressed concerns about the sustainability of the S&P 500's rally, which has exceeded mid-October predictions, and some suggested considering put-option spreads through year-end on select companies.

Wall Street strategists differed in their outlook on Corporate America's earnings for next year. While Citigroup Inc.’s Scott Chronert expected profits to hold up even in a recession, JPMorgan Chase & Co. strategist Mislav Matejka foresaw diminishing pricing power affecting overall revenue and margins.

A Citigroup index indicated that downgrades to U.S. earnings estimates have outnumbered upgrades for nine consecutive weeks, the longest streak since February. However, some anticipate a drop in analysts' estimates for 2024 in the coming quarter, potentially lowering the bar for companies.

Around seven companies were expected to sell new U.S. investment-grade bonds on Monday, with an estimated $10 billion in new bond sales for the week, mainly concentrated on Monday before the Thanksgiving holiday slowdown.

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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